In terms of volume, one of the most frequently traded currency pairings on the forex market is the United States dollar (USD) with the Canadian dollar (CAD). Considered to be a major pair, the USD/CAD is the most heavily traded currency pairing on the forex involving the Canadian dollar. Nicknamed the "Loonie," the policy makers that impact valuations of the USD/CAD are the U.S. Federal Reserve (Fed) and the Bank of Canada (BoC). Timely guidance decisions such as an interest rate adjustment or government debt purchase can rapidly prompt a bullish or bearish breakout in the USD/CAD.
USD/CAD is technically classified as a commodity dollar or "comdoll." A commodity dollar is a currency pair that features the money of two nations that possess and cultivate large amounts of commodities. Three forex majors are considered commodity pairs:
While the market value of precious metals often impacts USD/AUD and USD/NZD, energy commodities such as crude oil and natural gas exhibit a substantial correlation to exchange rate fluctuations facing USD/CAD.
US-Canada Trade Relationship
The trade relationship between the US and Canada places a great deal of importance on the stability of the exchange rate. For the year end 2017, Canada transported 76.4% of total exports to the United States, while taking in 51.5% of all imports from the US. Conversely, Canada served as the largest single destination for US goods and services (18.3%) while also being the US's third-largest trade partner behind China for 2017.
This trade relationship is strongly tied to the flow of energy commodities from Canada to the US. As of year end 2015, Canada served as the largest provider of oil to the US, shipping 3.76 million barrels per day and accounting for 40% of all United States petroleum imports. Accordingly, fluctuations in the pricing of crude oil often have a large impact upon the exchange rate of USD/CAD.
As a general rule of thumb, as oil prices rise, the Canadian dollar appreciates vs the United States dollar. Given an uptrend in West Texas Intermediate (WTI) and North Sea Brent (Brent) crude oil, the USD/CAD is prone to exhibit bearish price action.
To illustrate this point, basic technical analysis of the USD/CAD monthly chart from 2009-2011 is instructive. For the period of 1 January 2009 to 3 January 2011, the Loonie fell from 1.2184 to 0.9946, a loss of 2238 pips (-18.3%). This downtrend coincided with a massive rally in the global energy markets, with WTI crude oil prices spiking from a yearly open of US$61.95 per barrel (2009) to a yearly open of US$94.88 per barrel (2011). The US$32.95 per barrel gain (+53.16%) was the primary catalyst behind a strengthening CAD and reinforced the USD/CAD's standing as a commodity dollar.
The correlation between the pricing of energy commodities and the USD/CAD can be also be observed during the crude oil sell-off of September 2014 to February 2015. During this period, Western Texas Intermediate (WTI) crude oil futures fell from a value of US$95.31 per barrel to a bottom of US$42.03 per barrel (-55.9%).
The impact of the fall/winter selloff of 2014-2015 on the USD/CAD was substantial. Subsequently, the USD/CAD rallied from a value of 1.08724 in September 2014 to a value of 1.25168 in February 2015. The move represented a 15% appreciation for the six-month period, during which time WTI crude oil futures experienced a loss of over 50% of market value.
Unfortunately, the USD/CAD exchange rate volatility brought on by the devaluation in crude oil had substantial consequences for Canada. For the first time since 2009, the Canadian economy experienced a shrinking GDP, weakening dollar and a slip into recession. For the US, lower energy prices served as a catalyst for positive GDP growth and wider-spread economic stimulus. As a result, U.S. equities markets exhibited strength, with the Dow Jones Industrial Average (DJIA), S&P 500 and NASDAQ stock indices all rebounding from the global financial crisis of 2008.
Aside from Black Swan events such as the coronavirus (COVID-19) outbreak of 2020, the crude oil crash from September 2014 to February 2015 is a great example of how a primary market driver can enhance USD/CAD volatility. While only one aspect of a complex economic landscape, USD/CAD and its relationship to energy commodity pricing serve as an important indicator of the economic health of both nations.
Unlike cryptocurrencies, the USD/CAD's relative value is rooted in traditional market drivers and is a conventional financial instrument. The key underpinnings of the Loonie are FED/BoC central banking policies, oil prices and American/Canadian economic performance. Accordingly, key events such as economic metrics, election results or outliers like COVID-19 may all create turbulent trading conditions for the Loonie.
Past Performance: Past Performance is not an indicator of future results.
USD/CAD: Key Facts
U.S. Dollar (USD)
- Currency overview: USD is the official currency of the United States and its inhabited territories. USD is a decimalised currency, as one dollar consists of 100 sub units called "cents." USD acts as the world's reserve currency, with 62% of global foreign exchange reserves held by central banks being denominated in USD.
- Currency code: USD
- Central bank: United States Federal Reserve
- History: The Coinage Act of 1792 put into place the United States' first organised monetary system. Paper banknotes (dollars) were introduced into circulation in the mid-1800s, via creation of the US Treasury by Congress. The Federal Reserve act of 1913 created the central bank of the US, the Federal Reserve. Through the introduction of the Bretton Woods monetary system in 1944, USD became the world's reserve currency.
- Economy: The United States economy is considered to be a "mixed" economy, with both private industry and governmental intervention contributing to the overall economic output. The US accounts for nearly 25% of global GDP annually.
- Currency subunits: 1 USD consists of 100 cents
- Denominations: Bills: $1, $5, $20, $50, $100; Coins: 1c, 5c, 10c, 25c, 50c, $1
- Sixty-six countries peg the value of their currency to USD, or directly use USD as their national currency.
- Four currency pairings including USD are referred to as "majors." USD/JPY, GBP/USD, USD/CHF, and EUR/USD.
Canadian Dollar (CAD)
- Currency overview: CAD is the official currency of all ten provinces and three territories located in Canada. It's a decimalised currency, meaning that one dollar consists of 100 sub units called "cents."
- Currency code: CAD
- Central bank: Bank of Canada
- History: The origins of currency in Canada can be traced to the mid-17th century with the introduction of coins into the region by French colonists. In 1841, Canada conducted trade using the Canadian pound, a currency based on the pound sterling. Soon to follow in 1858, the Canadian pound was replaced by the Canadian dollar, which was based upon the United States dollar. The Bank of Canada came into being in 1934 and commenced the printing and issue of banknotes in 1935.
- Economy: Canada ranks as the 16th largest global economy in terms of GDP purchasing power parity. Abundant natural resources have spurred economic growth and the exporting sector. Canada ranks 13th in the world in exports, with the leading exports being crude oil, natural gas, electricity, wood pulp and timber.
- Currency subunits: 1 CAD is made up of 100 cents
- Denominations: Bills: CA$5, CA$10, CA$20, CA$50, CA$100; Coinage: ¢1, ¢5, ¢10, ¢25, $1 (known as a "loonie"), $2 (known as a "toonie").
- Currently, no countries peg their currencies to the value of CAD. CAD is used for trade in all 10 Canadian provinces and three northern territories. It's also sporadically accepted as legal tender in communities located in the northern US.
- CAD is considered to be a "major currency" or one of the eight most frequently traded currencies in the world. When paired with USD, it is considered to be a "major pairing."
This article was last updated on 5th January 2021.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…